Ecuador Weighs Escape From Dollar ‘Straitjacket’

Ecuador’s congress approved a new
law today that allows the government to create its own parallel
currency for use in local transactions as the government
struggles to meet spending commitments.

Congress voted 91-22 to approve President Rafael Correa’s
proposal to change the South American nation’s monetary and
financial laws, allowing payments in “electronic money” and
giving presidential appointees the power to decide who gets
loans and how lenders invest their reserves. The bill now goes
to Correa for his signature or veto.

As a current-account deficit drains dollars from the
economy, making it harder for Correa to fund a burgeoning budget
gap, a new currency could be used to meet government payments,
said Jaime Carrera, a former deputy finance minister and
director of the Quito-based Fiscal Policy Observatory. It could
also lose its value quickly if not backed by the central bank,
he said.

“There’s the doubt about whether the government is going
to use electronic money, either directly or indirectly, to meet
its payments,” Carrera said yesterday by phone.

‘Liquid Assets’

A congressional commission responsible for analyzing the
proposal said use of electronic money without explicit public
guarantees created “concern” and added language to the bill
ensuring any electronic currency would be “backed by liquid
assets of the Central Bank of Ecuador.” Lawmakers declined
industry group’s requests to include provisions to back the new
currency with a one-to-one dollar guarantee.

It’s not clear what assets that includes and if government
bonds qualify as liquid, Carrera said.

Oswaldo Larriva, a member of Correa’s political party and
president of the congressional commission that studied the
proposal, questioned attempts by lobbyists to require backing
the new electronic money with hard currency. He said the
government had expressed its commitment to using the central
bank to guarantee any issuance.

“To keep repeating the same thing, that dollarization is
at risk, isn’t an issue that goes against the president, it’s
against the nation,” Larriva said to reporters July 15 in
Quito. “Don’t repeat those things.”

‘Straitjacket’

Correa, who calls the South American country’s use of the
greenback an economic “straitjacket,” has already started
paying some pension obligations in government bonds, which
brokers are refusing to redeem at face value.

The temptation to issue new currency, rather than crimp
spending, may be too much to resist, according to lawmaker
Ramiro Aguilar.

“Correa’s economic model will always generate liquidity
problems in a dollarized economy,” Aguilar, an independent
legislator serving on the same commission as Larriva, said in a
July 14 interview. “You either change the model or you look for
more money.”

While the government says it won’t force anyone to accept
electronic money as payment, public employees and contractors
who want work may have little choice, Aguilar said.